Tuesday, May 17, 2016

Buying our own Home is usually a dream that people nurture right from a
young age and the dream grows as we grow older. The moment we take up a job,
the wheels get set in motion and we start thinking about when to sign on the
dotted line. The purpose of this article is to help you understand the
specifics of buying a Home on Loan and how Aditya Birla Finance Home Loans can
help you make your dream a reality.

Things an Individual Must Do Before Deciding to Buy a Home on Loan

A Home Loan is a long term financial commitment and hence requires a lot
of thinking before we eventually sign up. You will be expected to make monthly
EMI payments for the next 10-15 years or more and hence we need to be, firstly,
financially and secondly, mentally prepared to take up this commitment.

As a rule of the thumb, DO NOT opt for a Home loan that would require
you to make payments more than 50% of your Fixed Monthly Income towards EMI.
This is to make sure that you and your family does not have to compromise on
your living standards while you repay the loan.

Why a Home Loan?

A majority of us are from the working class or the middle-class as we
are colloquially referred to and hence, unless we hit the lottery jackpot,
buying a house that costs a more than a few lakhs by paying a full-cash
settlement is pretty much out of question. In order to motivate people to buy
their own homes the Government of India has been taking up multiple measures in
the past few years which include reduction of interest rates and elimination of
pre-payment penalties which were rampant up until a few years ago.

Banks and Financial Institutions alike have realized the potential
business in a populous country like India and have made Home Loans very
attractive. They offer loans to finance a big chunk of the property purchase
wherein the customer repays the loan over 10 to 20 years in monthly instalments.

If I were asked to make a Rs 25 lakh payment toward a house now or pay
Rs 25,000 per month for the next 15 years – guess which one I would choose? Get
the Picture?

Ever
wonder why Banks and Financial Institutions offer such long term loans? On average,
a customer pays around 200% or more of the loan sanctioned amount during the
entire loan tenure. Yes, if you take a Rs 25 lakh loan for 15 or 20 years,
chances are you will pay around Rs 50 lakhs or maybe even more depending on the
Interest Rate. Now, do you understand why Home Loans is a popular business for
Banks and Financial Institutions?

Why Choosing the Right Home Loan is Very Important?

As I mentioned a couple of paragraphs before, taking up a home loan is a
crucial decision that is going to impact your life for the next 10 to 20 years.
Every Bank and/or Financial Institution has its own formulae to determine your
loan eligibility. Some institutions offer top-class service while some drag
their feet the moment you sign the dotted line on the home loan agreement.
Every institution has its own fee structure and similarly each of them have
their own loan interest rate.

As customers we must focus on an institution that:

-Offers a Competitive Interest Rate

-Offers Good Customer Service

-Offers Good Loan Amount (Depending on our Eligibility)

-Does Not Charge Exorbitant Fees

-Does Not Expect us to buy other Financial Products as
a Bundle Package just because we are asking them for a Loan

The Home Loan Process

The Home Loan Process is pretty straightforward. Most banks and
financial institutions are willing to give you a provisional loan approval
letter based on your income and eligibility criteria even before you actually
identify your Dream Home. In fact, this would be a recommended approach because
you can easily narrow down the budget range within which you would have to limit
your search to.

As soon as we identify a property that peaks our interest, we need to
contact the builder and acquire the property related documentation. Along with
this documentation a Formal Loan Application would have to be made to the
Bank/Financial Institution that is financing the home loan. The institution on
its part would verify the document papers, the credentials of the builder etc
and once they are confident that the property is worth the price being quoted
and that this is a legit purchase, they will sanction the loan.

About Aditya Birla Housing Finance

The Aditya Birla Group is arguably one of the most popular business
houses/families in India and is respected across the country. Aditya Birla
Housing Finance Limited (ABHFL) is one of eight subsidiaries under the Aditya
Birla Financial Services Group (ABFSG) umbrella. ABHFL specializes in Home loans, Home Improvement
Loans, Loan Against Property, Construction Loans etc. They are a relative newcomer into the Housing
Finance Space who got their approval only in Q3 of 2014 and have been
aggressively expanding in the last 2 years. They also aim to give you a loan
that corresponds with your true worth.

As one of the most respected business families in the country, one thing
is certain – they know how to run a successful business. Secondly, as a new
player in the market, they are eager to expand their customer base. In a
country like India where almost every bank in the locality offers Home Loans,
Customer Service is going to be the key difference maker. Unless they can offer
markedly high quality customer services, customers would probably not be too
keen on signing up for new loans or move their existing loans to them. Some of
the reasons why ABHF Home Loans may be a good choice include:

·Attractive Interest Rates (Current Rate is 9.65%)

·Loan Tenure of up to 20 years

·Quick and Transparent Processing

·NIL Prepayment charges on Floating Rate Home Loans
(After 1 year)

·Personalized / Door step service

·Attractive Balance Transfer Options available

Loan Eligibility Criteria for ABHF Home Loans

Minimum Age: 21 Years

Maximum Age @ Loan Maturity: 60 years (This means the loan must mature
by the time the applicant is 60. So, if you are 44 years old, you cannot get a
20 year tenure. You will be asked to choose the 15 year tenure instead)

Minimum Loan Amount: 25 Lakhs for Metros (15 Lakhs for Non-Metro’s)

% of Property Value – Offered as Loan:

Up to 20 Lakhs – 90%

20 to 75 Lakhs – 80%

More than 75 Lakhs –
75%

Documentation Required for Home Loan

ABHF has one of the simplest documentation requirements among
institutions offering home loans. For Salaried Individuals below are the items
required:

-Income Proof (Last 3 Months Itemized Payslip showing
all deductions and Form 16/Tax Returns for the last 2 years)

-Last 6 Month Bank Statement (On the Account where
Salary or Income is Credited)

-Any other Income (Ex: Rent)

-Property Documents (The full bunch including all
requisite sanctions & approvals by the relevant authorities)

If you are Self-Employed/Business Owner, the only difference here is
that, a Chartered Accountant has to certify the computed annual income as
claimed in your tax returns.

Note: Don’t worry too much about the Property Documents part in terms of what
documents are required. Usually Builders will have a pack of documents that
they will hand-over to prospective buyers for the purpose of home loan because
frankly speaking, easily 75-80% of the people who buy homes get it on home
loan. To add further, the bank/financial institution will do a proper
due-diligence on the property and will ask you for specific additional
documentation about the property (if required)

List of Cities that are serviced by ABHF

As of the time of this writing, below are the cities/locations in India
where Aditya Birla Housing Finance is offering its services:

Some Last Words:

As mentioned earlier in this article, signing up for a home loan is a
very long term commitment with strong financial implications. So, please think
carefully before you sign the papers. Getting a home loan can be a harrowing
experience for some especially if you choose the wrong Bank/Financial
Institution for the same. Choose one that has a good reputation and offers
excellent customer service. Use Google, search for feedback from other people who
have taken loans from the institution you are considering. Who knows, you may
avoid a disaster after reading a few reviews on the Internet.

Saturday, May 7, 2016

If you are someone who has been following this blog, you would already know that I am not a big fan of ULIP products. There have been multiple articles about ULIPs in this blog and even a few articles where specific ULIP products have been reviewed. The irony is, after reading the article where I have clearly explained why investing in some ULIP is a bad idea, there are about numerous queries from prospective investors (via email or comments) who actually want to invest in the ULIP. So, I thought it would be a good idea to write a bit more about ULIPs and hence this article. The purpose of this article is to help answer this question – Should I Invest in ULIPs? What is a ULIP?ULIP stands for Unit Linked Insurance Plan and is actually a hybrid financial product that combines Insurance and Investment. Read this article about how ULIPs functionShould I Invest in ULIPs? For a change, I am going to answer this burning question right away and then elaborate the reason why. Important Note: The answer below is a general suggestion based on a review of multiple ULIP products that are available in the market. There may be a few ULIPs that could potentially be worthy of consideration and if you know any, please share the details and we could take them up for a more detailed review.

No, You Shouldn’t be Investing in ULIPs…

Am sure you are wondering, wow that’s a pretty bold statement and I agree. Yes, it is a bold statement and am pretty sure am going to get a lot of flak from people who either sell ULIPs or are big fans of ULIPs. Anyways, this is my personal opinion and am sure after reading the rest of the article, you might feel the same way too… Before we Begin: Actually, some of the reasons mentioned below could be clubbed up but I am explicitly splitting them up to signify the importance of each reason individually. Reason 1: Mixing Insurance and Investment is a REALLY BAD Idea Many financial experts across the globe agree that Insurance and Investments are two totally separate avenues and combining the two almost always results in bad outcomes. This has been my philosophy too. Buy Pure Term Insurance Products that offer super-high coverage for low rates and then invest in good financial products. The resulting outcome will DEFINITELY be better than that of a ULIP. Reason 2: ULIPs are COSTLY Keeping aside the philosophical difference that we shouldn’t be clubbing Insurance and Investment for a moment, the MAIN reason why I don’t like many ULIP products is the fact that they are COSTLY. The fees and charges you end up paying during the initial few years are exceptionally high and you will continue to pay hefty fees throughout the life of the product. The MAIN reason why salesmen hound you to buy these products is because they get a big chunk of this fees that you pay as their commission and hence they sell you the product even if they know it wouldn’t suit you. Some of the fees and charges include Mortality charges, Policy Administration charges, Fund Management charges, Premium Allocation charges and so on. Reason 3: The Insurance Coverage is NOT FREE One of the key selling points about ULIPs is the fact that you get Insurance Coverage along with the investment. Even though this is a true statement, the fact is that you are paying for this insurance coverage and in many cases the amount is much higher than traditional insurance products. Unfortunately, the guy selling the ULIP doesn’t explain this insurance part because if he mentioned that, you probably won’t sign-up for the product.

In May 2014, a gentleman named Virendra Pal Kapoor won a case against SBI Life Insurance Company. He was 65 years old at the time he signed up for the single premium policy for Rs. 50,000/- which was for 5 years. At the end of the 5th year, he got Rs. 248/- in return.

The ULIP he bought (Unit Plus II) offered life insurance coverage @ Rs. 3000 per year pear lakh of coverage. The Agent who sold him the product signed him up for 6.25x the coverage which means, every year Rs. 9000+ would be deducted from his invested amount as Insurance Coverage. So, for 5 years he paid Rs. 45,000/- as premium. After adjusting the commission and other fees, SBI Life Insurance returned what remained of his investment which is Rs. 248/-

This is a classic example of blatant mis-selling and sadly the senior citizen’s savings were eroded due to all this. The High Court of Allahabad actually reprimanded SBI Life Insurance for selling such products and requested IRDA to scrutinize ULIPs more closely. They also ordered SBI Life Insurance to return the investor his money but they contested the case in Supreme Court and nobody knows what happened after that.

Reason 4: Regulatory Rules are NOT STRICT The Insurance Regulatory and Development Authority of India (IRDA) is the governing body that regulates all Insurance products in India including ULIPs . IRDA has been regulating traditional insurance products and if you ask me the Rules & Regulations haven’t been adjusted to cover a complex product like ULIP that also invests in the Stock Market. Not only do the regulations leave much to be desired, the penalties for offenses are pretty much peanuts for the Insurance Companies. This is the primary reasons these guys come up with crazy ULIPs that have absolutely no interest whatsoever in the investor or his future and focus solely on selling something and making profits. Reason 5: ULIPs aren’t the ONLY Tax Saving OptionThe biggest selling point by most insurance salesmen who try to sell you ULIPS is the fact that you get tax savings of up to 30% of your investment every year. If you invest Rs. 1.5 lakhs this year, you will get a tax refund of Rs. 45,000/- right away and they try to convince you that you are getting this money back from tax authorities because you invested in this ULIP. Though it is true that ULIP investments offer tax benefits under Section 80C, the fact is, there are many other investment products that offer the same tax benefits and are much more suitable to your individual risk appetite.I have published an article that outlines all of the tax saving avenues and also a book that you can purchase that can greatly help you reduce your tax liability. Click here to learn more about the book. Reason 6: The Guaranteed Returns Concept is Mostly BS Some of the ULIPs nowadays have started Guaranteeing a certain % of your investment NAV at product maturity. Though this may sound like a good/safe investment option, if you look into it further, it’s actually more of marketing tactic than anything else. The guarantee being offered is mostly BS and nothing more. Firstly, the Guaranteed highest NAV is usually for a date that is at least 2-3 years or more prior to the maturity date. Secondly, the fund manager will explicitly move all your investments to Debt from Equity for the last few years to make sure the company isn’t going to spend money in guaranteeing your returns. By doing this, they are pretty much compromising your returns because, if you invest in debt instruments via a ULIP, after we deduct all the charges, your returns barely makes 5% in a year. I checked a few ULIPs that guarantee returns and they guarantee an average of about 150% of your investments in the first 5 years by the 10th year. Yes 150% of everything that was invested in the first 5 years sounds great but if you do the math, the average returns works to less than 6%. So, the guarantee they are giving investors is pointless. There are other investment options that can guarantee a much higher rate of returns than a measly 6% If you ask me, this whole Guarantee thing is a marketing tactic that was put in place to attract the investor who is usually wary of the stock market and to give them a false sense of safety that would motivate them to choose this product which they would’ve ignored in the first place.

Reason 6: ULIPs are VERY LONG TERM Investments Another key selling point for ULIPs is about, you pay premium just for 5 years and you can get back X times money in 7 or 10 years. On paper this sounds nice but if you ask experts, you have to stay invested for at least 10 years or even more when the stock market is doing great in order to achieve average returns of around 10%. The point about stock market doing good is of special importance because, your returns are linked to the stock market and during bad years your investment is probably losing value more than it’s gaining. Plus, with all the fees you pay each year, you would need at least until year 7 or maybe even year 8 to actually break-even (i.e., your fund value to match the total invested amount). So, you got to wait at least another 3-5 years for your investment to actually grow before you redeem - right?Reason 7: Choosing the Bond or Debt Investment Option in ULIPs is Investment Suicide When an insurance salesman is trying to sell you a ULIP product and you mention that you are not so keen on stock market investments owing to risk to capital, their first response is, we have Bond Fund options where your money is safe and grows at an average of around 8-9% per annum fully guaranteed. Actually speaking, there is truth to this statement and in fact Bond Funds can generate around 8-9% per year without much risk however the catch here is, not all of your yearly premium gets invested. As mentioned in Reason no. 6 already, if we offset all the fees & deductibles and then calculate based on the actual invested amount versus your yearly premium, the rate of returns work out to around 5%. Even your savings account earns 4% for just simply keeping your cash there. If you ask me, there are easier ways to waste money than choose the Bond Investment Option in a ULIP. Apart from paying a lot of fees to the insurance company and a sizeable commission to the agent, you aren’t doing much good anyways. You might as well donate some money to charity, at least you will be getting some good karma against your name that way. Reason 8: ULIP Returns are Almost Always DISAPPOINTING Actually Reason 8 is more of an offshoot of Reasons 2 & 3 Combined but needs to be mentioned explicitly because almost everyone that has asked me for investment advice starts off with, I invested in a ULIP but the returns are that good. The main reason for the same boils down to the incorrect expectations that are set at the time of selling the product and the high charges. When the insurance agent is selling you the product, he comes armed with a table of numbers worked up under the assumption if you invest 1 lakh per year for 5 years and then your investment grows at 12% or 15% for the next 15 years etc. and then shows a final figure of 1 crore or some super number. For majority of the middle class or working class, the chances of becoming a Crorepati is a distant dream and if a product can potentially make that a reality, anyone would get tempted. Sadly, the truth is, not the entire 1 lakh gets invested and this fees/deductions part that isn’t earning anything for you eats into your overall returns. Even in a good market year, after offsetting the usual fees/charges that get deducted, the overall returns generated would probably be in the range of 8 - 10%. If this is the number for a good market year, imagine the plight of an average year or worse a bear market? This is exactly the reason why almost all investors who choose ULIPs get disappointed when they see their annual fund statement. Reason 9: The Salesman Worries MORE about his Commission than Your InterestThis is the hard truth which we have to live with – PERIOD. The guy selling the ULIP products is a Salesman and is selling a product that offers him the best commission/fees. If today XYZ ULIP offers good commission he will sell it and if tomorrow its ABC ULIP, he will make the switch. You don’t have that luxury of switching. Once you Invest – you are stuck for the next 5 years or more and you cant even consider an early redemption. Early redemption would mean you have to forget at least 40 or 50% of your investment or maybe even more. If those salesmen put the interest of the Investor (YOU) first, would they be selling ULIPS with a 30% first year fee and 100% equity exposure to a guy in his 60’s? No, they won’t but sadly finding such a salesman in India is pretty much like finding an honest politician. So, you have to think about what is best for your financial future. The guy selling these fancy ULIPs wont and if you don’t, NOBODY else will. Some Last Words:Even though most people who invest in ULIPs end up making losses, we usually don’t share such bad experience with our friends & colleagues because we are afraid of what they would think about us if they found out that we made a bad investment choice. The truth is, everyone makes mistakes and it takes a lot of courage to admit our mistake and help prevent our friends & relatives from making the same mistake that we did. I know a lot of my friends who have lost a lot of money on costly ULIPs and that is one of the main reason why I am very much against ULIPs that charge hefty fees. There could be potentially some very good ULIP plan that charges minimal fees and may be a great investment choice. But, those are very rare and not marketed much because low-fee ULIPs basically mean lower commissions to the salesmen and those guys aren’t keen in marketing such products. Its our hard earned money and its our responsibility to be cautious when making Investments. Lastly, please do share this article in Facebook/Twitter so your friends and family members could learn more about ULIPs and be cautious when they are approached by an insurance salesman. Happy Investing!!!If you disagree with the points in this article or have had a Good/Bad experience with ULIPs, please feel free to share your thoughts in the comments section.

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All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.